CITIZENS, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q")
contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties.
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. Forward-looking statements can also be
identified by words such as "future," "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "will," "would," "could," "can,"
"may," and similar terms. Forward-looking statements are not guarantees of
future performance and the Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, statements concerning
any potential future impact of the coronavirus disease ("COVID-19") pandemic on
our business, as well as factors discussed in the "Risk Factors" contained in
our Annual Report on Form 10-K for the year ended December 31, 2020 which
are incorporated herein by reference. The Company assumes no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes included in Part I, Item 1 of
this Form 10-Q. The Company assumes no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
The U.S. Securities and Exchange Commission ("SEC") maintains a website that
contains reports, proxy and information statements, and other information
regarding issuers, including the Company, that file electronically with the SEC .
The public can obtain any documents that the Company files with the SEC at
http://www.sec.gov. We also make available, free of charge, through our Internet
website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by
officers and directors, news releases, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably practicable after we electronically
file such reports with, or furnish such reports to, the SEC . We are not
including any of the information contained on our website as part of, or
incorporating it by reference into, this Form 10-Q.
OVERVIEW
Citizens, Inc. ("Citizens" or the "Company") is an insurance holding company incorporated inColorado serving the life insurance needs of individuals inthe United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we provide insurance benefits to residents in 31 U.S. states and more than 75 different countries. We pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. We operate in two business segments: •Life Insurance segment -U.S. dollar-denominated ordinary whole life insurance and endowment policies predominantly sold to non-U.S. residents, located principally inLatin America and thePacific Rim through independent marketing consultants and whole life insurance sold domestically through independent agents; and •Home Service Insurance segment - final expense life insurance and limited liability property insurance policies marketed to middle- and lower-income households, as well as whole life products with higher allowable face values, inLouisiana ,Mississippi andArkansas , sold through independent agents and through funeral homes. IMPACT OF COVID-19 PANDEMIC The impacts of COVID-19 and related economic conditions on the Company's financial results, which began to affect the Company late in the first quarter of 2020, continue to be highly uncertain and outside the Company's control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results for the remainder of 2021.June 30, 2021 |
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Currently, some of the most significant factors that could cause our future results to differ significantly from our prior results or forward-looking statements include:
•decreased premium revenue due to disruption to our distribution channel and quarantines, travel limitations, business restrictions and decreased economic activity; •higher surrenders or lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts, particularly in our international business; and •a higher level of claims due to COVID-19 deaths. While we believe that the COVID-19 pandemic did not materially impact our results of operations during the first six months of 2021, the Delta variant of COVID-19, which is now becoming the predominant strain of COVID-19 globally, is leading to new or reinstated lock-downs and quarantines, and higher rates of transmission and deaths, particularly in unvaccinated individuals, and may materially impact future operations. We continue to monitor the impact of the COVID-19 pandemic on our operations. CURRENT FINANCIAL HIGHLIGHTS [[Image Removed: cia-20210630_g3.jpg]][[Image Removed: cia-20210630_g4.jpg]] Net income increased by$6.0 million during both the three and six months endedJune 30, 2021 to$5.0 million and$1.4 million , respectively, compared to the prior year periods due primarily to an increase in realized gains of$3.4 million and$5.0 million , respectively in the three and six months endedJune 30, 2021 . The realized gains primarily reflect changes in the fair value of our limited partnership investments during the second quarter of 2021. We did not sell these investments in the second quarter of 2021, but as discussed in Part I, Item 1, Note 5. Investments , changes in fair values of our equity securities are reflected in realized gains, in addition to executed transactions that result in a gain or loss. Net income in the three months endedJune 30, 2021 was also positively impacted by an increase in premiums and more favorable mortality experience in ourHome Service Insurance segment as compared to the three months endedJune 30, 2020 , and a$0.8 million reduction to increase in future policy benefit reserves due to the conversion of a block of business to our new actuarial valuation system as described in Part I, Item 1, Note 1. Financial Statements . Total benefits and expenses of$58.0 million and$116.2 million , respectively, in the three and six months endedJune 30, 2021 were$0.1 million and$0.3 million higher than the respective periods in 2020. The increase was primarily due to increases in claims and surrender benefits paid in our Life Insurance segment. Death claim benefits paid in the Life Insurance Segment, increased by$0.6 million , or 48.8%, in the three months endedJune 30, 2021 as compared to the 2020 period and increased by$1.6 million , or 52.7%, in the six months endedJune 30, 2021 as compared to the 2020 period. The higher claim expense was a result of a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount. We also continued to experience an increase in surrender benefits in the Life Insurance segment, which increased by 28.1% and 17.7%, respectively, in the three and six months endedJune 30, 2021 , as compared to the prior year periods. We believe the continued trend of higher surrenders is due primarily to the aging block of business, as the business ages, the surrender charges decrease, and to a lesser extent, global economic circumstances.June 30, 2021 |
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Consolidated Revenue Highlights
Life insurance premiums and investment income are our primary sources of
revenue. In the three months ended
•Insurance premiums increased by$1.3 million , or 3.2%, due to an increase in first year premiums in our Life Insurance segment and an increase in both first year and renewal premiums in ourHome Service Insurance segments. We believe these increases were driven by our focused marketing campaigns and improved sales practices, as well as lower sales in prior year period due to COVID 19 impacts previously described. •Net investment income increased by$0.4 million , or 2.7%, despite a lower average portfolio yield in the current year period due to a growing base of assets.
In the six months ended
•Insurance premiums declined by$1.0 million , or 1.2%. The decline was driven by our Life Insurance segment, as renewal premiums declined 6.4% to$52.0 million in the first quarter of 2021 from$55.6 million in the same period in 2020. The decrease in renewal premiums resulted primarily from a decline in our in force business in this segment, which is due in part to changes we made to our products and distribution over the last few years. •Net investment income increased by$0.5 million , or 1.6%, due to the growing asset base and the make-whole call redemption described below in the "Consolidated Results of Operations".
Additionally, as discussed above, realized investment gains increased by
Other income consists primarily of policyholders in our Life Insurance segment selecting supplemental contracts upon maturity of their original policies, which has been increasing over the past few quarters.
Consolidated Benefits and Expenses Highlights
The primary use of our funds is the payment of insurance benefits for claims, surrenders and matured endowments. As discussed above, our claims and surrender benefits incurred increased by$1.5 million and$5.7 million , respectively, in the three and six months endedJune 30, 2021 as compared to the same periods in the prior year; however, total insurance benefits paid or provided was essentially flat year-over-year, as the increase in claims and surrender benefits was offset by a decrease in future policy benefit reserves. Future policy benefit reserves decreased due to the decline in the in force block of business and the conversion of a block of policies to our new actuarial valuation system mentioned above. The other primary uses of funds are the costs related to selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses. Costs incurred related to selling our insurance products were higher for the three and six months endedJune 30, 2021 as compared to the same period in the prior year. First year sales for both our Life Insurance andHome Service Insurance segments increased substantially in the second quarter of 2021 compared to the comparable period last year, when premiums were materially impacted by the COVID-19 pandemic as disclosed previously. Commissions on our first year sales are much higher than commissions on our renewal business. Other general expenses were slightly higher for the three and six months endedJune 30, 2021 due to higher rent at our new headquarters and higher legal fees due to the various legal proceedings described in our Form 10-K for the year endedDecember 21, 2020 . June 30, 2021 | 10-Q 31
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Financial Condition at
•Total investments of$1.6 billion ; fixed maturity securities comprised 91.7% of total investments. •Total assets of$1.8 billion . •Total stockholders' equity of$0.3 billion . •$4.6 billion of direct insurance in force. •No debt. •Fully diluted earnings per share of Class A common stock of$0.03 .
OUR OPERATING SEGMENTS
Our business is comprised of two operating business segments, as detailed below.
•Life Insurance
•Home Service Insurance
Our insurance operations are the primary focus of the Company, as these
operations generate most of our income. See the discussion under Segment
Operations below for detailed analysis. The amount of insurance, number of
policies, and average face amounts of ordinary life policies issued during the
periods indicated are shown below.
Six Months Ended June 30, 2021 2020
Average Average
Amount of Number of Policy Amount of Number of Policy
Insurance Policies Face Amount Insurance Policies Face Amount
Issued Issued Issued Issued Issued Issued
Life Insurance $ 108,680,985 1,803 $ 60,278 $ 84,017,811 1,315 $ 63,892
Home Service Insurance 99,978,080 13,868 7,209 65,239,577 9,230 7,068
Total $ 208,659,065 15,671 $ 149,257,388 10,545
Total insurance issued increased by 39.8% in the six months ended June 30, 2021 ,
from $149.3 million in the first six months of 2020 to $208.7 million in 2021,
as both our Life Insurance and Home Service Insurance segments experienced
growth. We issued 15,671 new policies in the 2021 period, as compared to 10,545
new policies in the 2020 period. Our sales for the second quarter of 2020 were
unusually low, especially for our Life Insurance segment due to the impact of
the COVID-19 pandemic during this time.
The number of policies issued in the six months ended June 30, 2021 increased
37.1% in the Life Insurance segment from the same period in 2020. We believe the
increase in the first half of 2021 was primarily due to enhancements to our
business operations and sales practices to account for the impact of the
COVID-19 pandemic, new sales promotions and campaigns, focused training on
virtual selling and strategically prioritizing selling lower face amount
policies, which typically have less stringent underwriting requirements and, in
some cases, may not require the completion of medical tests, as many of our top
international markets remain in quarantine due to the COVID-19 pandemic. In
addition, in order to address the decreasing first year premiums we have seen in
recent years in this segment, we prioritized recruiting new independent
contractors in the first quarter of 2021, and we began to see the impact of
these efforts through June. Although applications increased during the first six
months of 2021 compared to the same period last year due to these enhancements,
average policy face amount declined, as we continued to emphasize the selling of
lower face amount policies, as noted above.
The number of policies issued in the six months ended June 30, 2021 increased
50.2% in the Home Service Insurance segment compared to the same period in 2020.
We believe the increase in our Home Service Insurance segment was driven by the
broadening of a sales campaign introduced during the third quarter of last year
targeted at existing policyholders that emphasizes increased coverage as well as
fewer applications received in the prior
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year period as the onset of the COVID-19 pandemic and stay-at-home orders
negatively impacted our business. During the first quarter of 2021, as part of
the campaign, we increased the target face amount of insurance. As a result, the
overall average face amount of policies issued for the Home Service Insurance
segment increased during the six months ended June 30, 2021 compared to the same
period last year.
CONSOLIDATED RESULTS OF OPERATIONS
A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.
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